The BBC's Chris Morris in in Istanbul"A considerably higher amount than most analysts had been expecting" real 56k

Wednesday, 6 December, 2000, 15:16 GMT

IMF agrees Turkish loans

The IMF package provides new hope for citizens of Istanbul

A $10bn emergency aid package aimed at lifting Turkey out of its worst financial crisis in years has been announced by the International Monetary Fund.

"Talks over additional financial resources with the IMF to support a strengthened economic programme have ended in full agreement," Prime Minister Bulent Ecevit said on Wednesday.

Turkey's stock market shot up 18.6% on Wednesday, closing at 10,387 points, on the back of the news.

On Tuesday, the stock exchange had registered a record 19.5% rise in anticipation of the news.

"The announcement has served to inject confidence into the markets," said Tolga Koyuncu, a trader at Iktisat Investment.

The rally on both days all but reverses the 44% fall in share prices since the middle of November, when the financial crisis was sparked by a corruption probe into 10 small banks in receivership.

The World Bank joins in

The World Bank said that following the IMF deal, it may accelerate loans to support banking reform in Turkey.

"Discussion on a $500m state bank restructuring support loan is underway," the World Bank said in a statement.

The loan would be part of a previously announced $5bn support package for the period of July 2000 to June 2003.

Urgent reform

The Turkish government would "strengthen the banking sector, increase foreign currency revenues through privatisation, and speed up the fall in inflation" Mr Ecevit said, adding that the inflation target for 2001 remained 12%.

Government guarantees for bank accounts and for loans to the banking sector will also be retained until the banking sector recovers, he said.

But he warned that there would be no guarantees on the accounts of bank owners or the capital of bank partners. The government would also not guarantee accounts related to criminal activity.

Conditional lifeline

The IMF announcement was seen by market players as a vote of confidence in the Turkish government's reform plans.

The aid package "will consist of an amount equivalent to some $7.5bn under the Supplemental Reserve Facility (SRF), and approximately $2.9bn available to Turkey under its current arrangements," said the IMF's European department director Michael Deppler.

The hope is that the breathing space given to the financial markets following the IMF announcement could mean foreign money can now begin to return to Turkey, and interest rates could then be slashed.

But the strict conditions that are expected to be attached to the IMF aid package are a contentious issue, and have already triggered widespread demonstrations in Turkey.

The IMF is expected to have demanded that Turkey cuts state spending and pushes on with its extensive privatisation program.

On Wednesday, Mr Ecevit said the government would indeed go ahead with the privatisations of Turk Telekom and Turkish Airlines, as well as the privatisation of the country's electricity industry.

"Privatisation revenues will be an important fund for the budget deficit and will contribute to compensate for the depleted hard currency reserves," he said.

Worried workers

At stake - seen from the Turkish workers' point of view - are job security and wage levels.

"The economic policies, the structural reforms, as we have seen elsewhere, especially in Asia, have an effect - it means that wage rises are low, unemployment is rising - people feel extremely uncertain," said BBC's correspondent Chris Morris.

But the panic caused by the police inquiry into the banks' behaviour would also threaten people's jobs.

The crisis sent investors scurrying for hard currency, with many foreigners pulling their money out of the country because they feared that the whole banking sector could be unstable.

On Wednesday, Turkey made an offer to four leading private Turkish banks to buy a total of $1 billion worth of short-term treasury bills in a move designed to help ease the liquidity shortage caused by the drain on the central bank's dollar reserves.

The government's injection of liquidity into the economy contradicts its anti-inflation policies of high exchange rates and the maintenance of tight monetary conditions.

But the government was forced to act when fears of a banking crisis brought the Turkish banking system to a virtual standstill.

Many Turkish banks were simply wary about dealing with each other.

Interbank interest rates soared, and the official short-term interest rates rose briefly to 1,700% to relieve the pressure on the Turkish lira.

Rumours of a possible currency devaluation has further fuelled the financial crisis because this could destroy Turkey's anti-inflation program and put the breaks on its privatisation process.